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ISCOVER
Every so often, the industry considers the state of the housing market in Australia, and access to property ownership to various market segments including first home buyers, older Australians, the self-employed and investors.
Inevitably, the spotlight focuses on the perceived range of problems of the LMI industry; specifically the small number of LMI providers in Australia, the similarity of their products, and the prohibitive costs for higher LVRs.
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In the 1990s, the Australian mortgage industry enjoyed choice from four mortgage insurers in Australia. At one time, the players included CGU, Royal and Sun Alliance, MGIC, and the Housing Loans Insurance Corporation.
After CGU and RSA withdrew from the market, only two players remained. MGIC become PMI and are now QBE LMI, whilst the government entity HLIC was sold to Genworth in 1995.
Only having two LMI providers in Australia is far from perfect. It exposes a vulnerability of the reliance of mortgage providers, and banks in particular, on LMI policy.
But is the problem as big as it seems?
Aside from Genworth and QBE, Westpac in particular has enjoyed their own ability to underwrite the policies of their own balance sheet-funded loans, as well as those of RAMS, BankSA, St George and Bank of Melbourne.
Similarly, the Commonwealth Bank uses its Low Deposit Premium product to self-insure high-LVR loans that would otherwise require mortgage insurance. CBA also has ‘open policy’ with its mortgage insurer, meaning its mortgage insurer will insure a given loan offered by the CBA that it would not insure with any other lender.
Other lenders such as ANZ, Pepper, Liberty and Resimac all have their own self-insured products, each of them having broader underwriting criteria, resulting in access to greater levels of property ownership.
The duopoly that seemingly exists in the LMI space, and the unnecessary restrictions that some property buyers (those without a savings pattern for example) may experience as a result, is often able to be overcome by a broker with a deep knowledge of lending and underwriting policies of the alternatives.
Brokers can also use these same lenders for assisting borrowers with refinances that are outside ‘traditional’ LMI policy.
Third-party LMI providers will restrict LMI approvals to borrowers with various levels of credit impairment. They will restrict access to borrowers accessing equity in their property, despite borrowers being able to prove serviceability. They even restrict what borrowers can do with that equity in many circumstances. Viable LMI alternatives offered by banks and non-banks solve this problem.
The issue of cost is one that is often quoted, and how prohibitive it is on property ownership.
These claims are largely without merit. Most lenders will allow 2 per cent of the cost of LMI to be capitalised above a maximum LVR of 95 per cent, thereby offering an effective net LVR of 97 per cent – ironically, a higher LVR than the 100 per cent LVR loans that used to have the cost of LMI deducted from them. A small number of lenders permit full capitalisation of LMI cost without any restrictions.
There is one alternative that deserves consideration when it comes to the cost of LMI, however.
Under current arrangements, a one-time premium is paid by the borrower. This covers the lender for financial loss for the life of the loan. However, the potential for financial loss is higher during the first few years, while the LVR is higher (or while the LVR exceeds 80 per cent, according to LVR policy). The potential for loss in the final 20 years of the loan is virtually zero. So why should a borrower pay for cover during the last 20 years?
Rather than a lump sum premium, borrowers taking out a P&I loan should be offered a second alternative of paying LMI in monthly instalments. These monthly instalments would be made alongside the mortgage payment (perhaps even collected by the lender).
Premiums would be paid whilst the LVR exceeded 80 per cent. As the loan balance reduced over time through loan amortisation, the premiums would stop once the LVR of 80 per cent was reached. If the property value increased through market forces (determined by a property valuation at the cost of the borrower) so that the LVR was also at or below 80 per cent, premiums would again stop.
The common suggestion of LMI portability is then made redundant.
This initiative could be immediately introduced by the self-insured lenders, and even offered by Genworth and QBE in a short period of time (given they are both US-based LMI providers that offer this product in their home country).
Given product innovation is somewhat limited, and lenders are clamouring for an edge that differentiates them from their competitors, this would be a winner on all fronts.
